A lower hurdle to M&A in US mobile telecom

ShuliRen

The biggest hurdle to more M&A in the U.S. mobile telecom market, in particular from the big four down to three, has been the U.S. Government, as seen by AT&T's failed attempt to buy T-Mobile 2011. This time it is different.

Here's the present landscape: In a $25.5 billion offer for Sprint, Dish Network Corp. could scuttle SoftBank Corp.'s takeover of the U.S.'s third-largest mobile telecom. T-Mobile USA is in the process of a reverse merger with regional pre-paid carrier MetroPCS Communications, Inc. and Verizon Communications, Inc. wants to buy out its minority partner (45% stake) - Vodafone PLC - to have sole ownership of Verizon Wireless.

Some analysts think an eventual merger between Sprint and T-Mobile is inevitable. The U.S. government is the biggest hurdle to the "inevitable" merger between Sprint and T-Mobile that analysts envision. In 2011, the Department of Justice blocked a merger between number two and number 4, i.e., AT&T and T-Mobile.

This time may be different, however. The Herfindahl Index (HHI), calculated as the weighted sum of market share squared, is used as a first-test that measures the level of competition in a given market. A HHI between 1500 and 2500 is considered "moderately competitive."

Currently, U.S. mobile telecom's HHI is about 1994. A merger between T-Mobile and Sprint would give rise to an HHI of 2156. Granted, before-and-after HHI's are not in the ideal competitive category (under 1500), Department of Justice understands that telecoms have a natural declining average cost structure, or, economies of scale.

By comparison, a merger between AT&T, Inc. and T-Mobile, as proposed back in 2011, not surprisingly, raised eyebrows. Under that scenario, and using today's market share data, HHI would rise to 2462, cutting close to the government's 2500 high-concentration watermark.

Recently, the Department of Justice sent the Federal Communications Commission (FCC) a letter, ahead of the impending low-frequency spectrum auction hosted by the Commission. In that letter, DoJ raised concerns that Verizon Wireless and AT&T may use pure financial heft to price out their smaller competitors. It went so far as to suggesting the FCC restrict the amount of spectrum a telecom can hold.

We can interpret the letter as the Department of Justice being sympathetic to a potential merger between numbers three and four.

But whoever the eventual owners of a combined Sprint and T-Mobile may be, Dish Network seems bent on being part of that game, because, also inevitably, pay-TV business - which Dish Network operates - is on a secular decline.

Pay-TV is already a saturated market. 90% of U.S. households are subscribers via cable or satellite. Since 2007, consumers have been trickling out, although slowly at 2-3% a year, to video streaming services such as Netflix and Hulu. The pace of cord cutting is only going to increase though, given the rising cable bills passed on partially to offset the increasingly expensive programming costs that media companies charge to cable operators.

Looking across the cable industry, Dish Network is uniquely exposed. By offering triple-play services - bundled offerings of cable, telephony and broadband - its peers can essentially subsidize video via broadband. Dish Network, by comparison, receives almost all its revenue from pay-TV.

In addition, to protect their margins and growth, Dish Network's peers are either moving upstream into content production or overseas. Market leader Comcast Corp. is diversifying into free-to-air network, having bought out GE's 49% stake in NBCUniversal for $16.7 billion in February. Time Warner Cable, Inc., the second-largest cable operator, is busy snatching popular local sports rights in the wealthy Los Angeles metro area, signing a record deal (estimated to be worth over $6 billion) with the Los Angeles Dodgers baseball team in February, and a $3 billion deal with Los Angeles Lakers basketball team last year.

This leaves Dish Network .. well, with an empty plate. Which explains the increased aggression, even desperation - trying to strike deals into mobile telecom, on which it bets its future growth. So it's not about to leave the table.

This article first appeared on DJ Banking Intelligence, our specialist subscription-only service that provides transaction-focused forward-looking commentary and opinion from our sector experts. Further details are available at www.djbanking.com

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